GBP/USD bulls knocked down a peg as Ukraine crisis intensifies

• GBP/USD bears are moving in on the hopes of a cease-fire dashed by relentless Russian attacks. 
• Oil prices back on the bid, risk-off, US stocks lower and USD higher, weighing on GBP.

GBP/USD is trading around 1.313, 0.3% higher on the day in a technical move as the US dollar ebbed overnight on what, at first glance, seemed to be the makings of a breakthrough in Ukraine & Russian peace talks. However, the optimism over Ukraine-Russia peace talks waned on Wall Street and concerns over a recession are growing due to the prospect of a sharp rise in interest rates that is expected to hurt economic growth.

Ukraine crisis peace talks hopes dwindle

GBP is considered as being a risky currency and as such, it is coming under renewed pressure on Wednesday. The pair has started to slide from a high of 1.3182 that had been marked in the early New York trade.  The Kremlin was reported to say that there was no sign of a breakthrough yet even though it welcomed Kyiv's move to set out its demands in written form. Ramzan Kadyrov, who is a powerful head of the Russia's republic of Chechnya, said on Wednesday that Moscow would make no concessions in its war in Ukraine and that Kremlin negotiator Vladimir Medinsky had been wrong to suggest otherwise. Polish Deputy Prime Minister also crossed the wires and stated that Russia is preparing for a new attack in Ukraine and all indications are that we are facing a long war,  Aljazeera Tweeted. 

As a consequence, US stocks fell on Wednesday. The S&P 500 is now down 0.6%. Markets had rallied in the previous session after Russia pledged to scale down military operations around Kyiv and in northern Ukraine. However. On Wednesday, Russian forces bombarded the outskirts of Kyiv. The US had warned on Tuesday they were skeptical of Russia’s vow to curtail its military assault on Ukraine’s capital, Kyiv, and the northern city of Chernihiv, ending the day with a note of caution after hours of peace talks between the two sides appeared to make some headway.

Still, there may be some hope yet. Following yesterday's talks, Ukrainian presidential advisor Mykhailo Podolyak said that there were ''successful enough for a possible meeting between Putin and Zelensky.''  he added, “we have documents prepared now which allow the presidents to meet on a bilateral basis," he said.

Eyes on oil prices

Looking at the positioning data, net short GBP positions had increased noticeably for a third week as concerns rise as to the cost of living crisis in the UK, so any signs of relief there are bound to support the pound in the spot market as inflation concerns abate.

There will therefore be a close eye kept on the price of oil and progress in peace talks that could trigger a sell-off in energy prices that might go a long way in supporting a recovery in the pound.  Oil prices rebounded from day prior losses early on Wednesday on a report US inventories fell again and on skepticism over Russian promises during peace talks. West Texas Intermediate crude in the spot market is breaking $108bbl in New York trade. 

BoE in focus

Meanwhile, the Bank of England's Governor Andrew Bailey acknowledged that the bank has softened its guidance on rate hikes this month to reflect the high level of economic uncertainty. This was backed up by BoE's Deputy Governor Ben Broadbent who has warned that the Ukraine crisis will have a big impact on the U.K. outlook:

• “As a big net importer of manufactures and commodities, it’s doubtful that the UK has ever experienced an external hit to real national income on this scale.” 
• “From the narrow perspective of monetary policy it will result in the near term in the difficult combination of even higher inflation but weaker domestic demand and output growth.”  

Looking ahead, analysts at Brown Brothers explained that, ''at the March 17 decision, the bank said that further tightening of policy “might be” appropriate in the coming months vs. the forward guidance in February, when such a move was seen as “likely.” Bailey said that while it’s been appropriate for the BoE to tighten policy under current circumstances, forward guidance should reflect the current heightened uncertainty,''

''WIRP suggests a hike at the next meeting May 5 is fully priced in, with only 25% odds of a 50 bp move then vs. 50% at the start of this week. Swaps market sees the policy rate at 2.25% over the next 12 months, up from 2.0% at the start of last week. Risks of another 25 bp of tightening over the following 12 months have now been priced out,'' the analysts added.

Key data events

Looking ahead for the week, US Nonfarm Payrolls data will take centre stage as a meanwhile distraction to the Ukraine crisis this Friday. ''Employment likely continued to advance in March following two strong reports averaging +580k in Jan and Feb,'' analysts at TD Securities said. 

''That said, we expect some of that boost to fizzle, though to a still firm job growth pace of +350k. Indeed, job gains should lead to a new drop in the unemployment rate to a post-COVID low of 3.7%. We also expect wage growth to slow to a still firm 0.3% MoM pace.''

GBP/USD technical analysis

The following illustrates the pound's bullish trajectory on the daily chart in an M-formation:

GBP/USD daily chart

The chart above was from the prior day's close. The price attempts to recover towards the neckline of the formation: